November 2, 2021

Gambling Sites Are Coming for The Athletic

After The New York Times walked away from acquiring The Athletic, I could see very few remaining acquisition options for the subscription media company. As I wrote at the time:

One option is that The Athletic tries to sell. The Information reports that it is seeking $750 million. The problem is that the bench of companies that could pony up $750 million for a business that doesn’t appear to be growing that quickly—and will barely make a profit in the next two years—is just not that large. I thought The New York Times was a good buyer, but not at this price.

What is the right price? Finding comps is always tricky because every deal is unique. But let’s try a loose comparison. Politico just got purchased for $1 billion or 5x revenue. More than half of Politico’s revenue comes from its very sticky, high-priced membership, so this may not be the best comparison (unfair to Politico). But let’s say 5x is the benchmark. Based on 2021 target revenue for The Athletic of $77 million, it’s probably worth less than $400 million (or 20% less than its last valuation).

It’s unfair to compare a B2B company like Politico, which is profitable and generating nine figures from $10,000+ subscriptions to a consumer sports media company losing money, but I thought it would act as a sufficient “top” for what a true valuation warrants.

Acquisition has always been the only real option on the table. If it could raise more money, it would have; however, with the amount of burn it has, it’s hard to imagine investors wanting to add cash to the furnace. I have empathy for what the team is trying to do because it’s very hard to scale a media company in such a compressed period of time. I certainly don’t have the blind conviction to try.

That leaves The Athletic scrambling to find a buyer. According to The Information, a variety of companies have made bids, including FanDuel and DraftKings. The high-level logic makes sense.

While The Athletic is losing money, it has an avid fan base which could be attractive to a betting company. FanDuel and DraftKings have lately been spending hundred of millions of dollars on marketing, including TV ad campaigns to attract customers. Just this year the two companies have spent $89.3 million on national television advertising, compared to $53.8 million for the same period last year, according to research firm iSpot. Acquiring The Athletic could help FanDuel or DraftKings reduce their marketing spending.

Presently, the two brands are spending a lot of money on advertising, but have nothing in an owned media audience. Anytime they want to find new customers, they have to pay publishers. But there has been a real flurry in deal activity from gambling sites picking up sports assets.

For either of these gambling sites, getting The Athletic gives it an owned audience that it can continue to market to over time rather than being reliant on expensive brand campaigns.

But here’s the question…

If I’m DraftKings (will use them as a proxy because they’re public), why am I choosing to buy The Athletic of all sports media sites?

One could say all the traffic, but The Athletic is unique here because it requires a paid subscription. According to SimilarWeb’s Google Analytics connection, The Athletic had 20.11m sessions in September. My suspicion is that this is a smaller group of people coming back repeatedly throughout the month rather than anything close to 20m uniques. On the other hand, maybe it does have a very high number of unique visitors. The Athletic has so many journalists, it’s certainly possible that they’ve got an immense top of funnel.

My suspicion is that DraftKings’ first instinct would be to immediately take the paywall down and start accruing a much larger audience, trying to get people to create free accounts so it knows what teams and sports readers like. This would create an almost perpetual top of the funnel for DraftKings to grow its business.

The problem with getting rid of the paid subscription is that it suddenly adds $100m+ in costs. According to an older story from The Information:

Last year, when Covid suspended most sports, the firm generated revenue of $47 million, while its cash burn was $41 million. The Athletic is projecting that revenue will rise 64% to $77 million this year, while its cash burn drops to $35 million. Next year The Athletic expects its cash burn to drop sharply, to about $7 million. And the company has told investors it expects to be marginally profitable in 2023 on revenue it projects will be $156 million.

If revenue is $77 million this year and it’s still going to burn $35 million, that means its non-revenue total cost is $112 million. And that cost doesn’t suddenly go away because so much of the money is tied up in cost. It’s possible that DraftKings could come in and dramatically cut costs—aka start letting people go—but this puts The Athletic into a death spiral that is impossible to get out of.

So, that means DraftKings has to keep the subscription up for a period of time to try and keep the cost of the business from destroying its cash position. But that then interferes with its ability to maximize the top of funnel.

Maybe that’s okay, though. DraftKings could be looking at The Athletic’s million+ paying subscribers as prime targets for its betting platform. My instinct tells me that this isn’t really the case, though. If you’re spending $60-70 a year in sports content, it’s likely that you’re aware of the gambling opportunities. Therefore, this feels like more of an engagement and retention play for DraftKings. Does owning something like The Athletic drive an increase in gambling activity?

Another option could simply be that DraftKings creates two currencies for getting access to The Athletic: paying with dollars or paying with betting activity. Could DraftKings create an offer that basically says, “bet $50 on a game and get The Athletic for free for a year?” That’s pretty compelling.

I dug into DraftKing’s financials and there’s something compelling there. In Q2, it had 1,123,000 average monthly unique players (MUP). Its average revenue per MUP was $80, up from $63 in the same period last year. Compare that to The Athletic. It expects $77m in revenue this year and my guess is it finishes the year at 1.3 million subscribers. That brings us to an ARPU of $59. DraftKings basically gets a 30% premium if it can convert a paying subscriber into a paying gambler.

Having a media asset to promote to those 1,123,000 average MUPs would keep them more engaged with the platform and might actually get them gambling more. That, in turn, would increase ARPU and make the asset even more profitable for The Athletic.

But is it enough? And all of this is highly speculative considering DraftKings doesn’t actually own the asset.

The reality for The Athletic is sadly, very simple, though. The number of available buyers to do a deal like this is very small. The gambling sites are probably their best bet. But they’re not going to pay nearly 10x revenue for this (it’s reported that The Athletic wants $750m). The gambling sites have all the leverage. The Information reported a month ago that The Athletic had eight months of runway remaining; now it’s seven.

If I was a betting man, I’d say that $350 million is the top for this. That would be about $150 million less than its last fundraising round. That would be equal to approximately two-quarters of DraftKing’s marketing spend before the yearly cash burn.

I said it last time and I’ll say it again now. I admire what The Athletic has tried to do. However, it is not in a position of strength. It either needs to cut costs aggressively so that it can stay alive independently or, it’s going to have to take a significant cut in its valuation. The New York Times was its best option for a media buyer interested in a growing subscription business. But those times are behind us now.

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